Dan’s Discount Corporation uses target costing to aid in the final decision to release new products to production. A new product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique features will generate a total demand over the product’s life of 65,000 units at an average price of $380. The target costing team has members from market research, design, accounting, and production engineering departments. The team has worked closely with key customers and suppliers. A value analysis of the product has determined that the total cost for the various value-chain functions using the existing process technology are as follows:
Value-Chain Function ...... Total Cost over Product Life
Research and development ......... $ 2,100,000
Design ................. 250,000
Manufacturing (40% outsourced to suppliers) . 5,000,000
Marketing ............... 1,400,000
Distribution ............... 1,500,000
Customer service ............ 3,070,000
Total cost over product life ........ $13,320,000
Management has a target contribution to profit percentage of 50% of sales. This contribution provides sufficient funds to cover corporate support costs, taxes, and a reasonable profit.
1. Should the new product be released to production? Explain.
2. Approximately 40% of manufacturing costs for this product consists of materials and parts that are purchased from suppliers. Key suppliers on the target-costing team have suggested process improvements that will reduce supplier cost by 15%. Should the new product be released to production? Explain.
3. New process technology can be purchased at a cost of $220,000 that will reduce non-outsourced manufacturing costs by 30%. Assuming the supplier’s process improvements and new process technology are implemented, should the new product be released to production? Explain.